First Investment Property – Need Help

Hi Paul,

Lets clear things up, If I buy the property for $400k and on-sell this to your contact for $468k, I make $68k for the 25 years the loan is in place (if required). For that, I keep no growth in the property, but I do get payments above the normal interest rate that will give me how many dollars per week (assuming 2%, I will get $153 p.w.)?

So in that period, if the property grows to $2.4M (as it historically will, assuming the double every 10 years), I only make $68k + ($153 p.w. = $200k)    Total = $268k,          $2M v $268k : I am missing something as this looks terrible….

Do you take a cut out of this? 

I thought this process is illegal in the eyes of the bank?
  
http://www.birchcorp.com.au

Hi number 8

Generally we structure the contract that the for the first 2 years we charge the standard variable rate, then it progressively increases (1%, 2% etc…) each year to motivate the buyers to buy us out. This provides positive cashflow for a few years and then a lump sum payout generally after 5yrs at most.

The idea is about fast return on investment without having to wait a decade or 2 so that we can move on to the next bigger investment.

Vendor finance/installment sales contract is legal in Australia except for south Australia and has been for over a century,

Here is the link to vendor finance info on this website https://www.propertyinvesting.com/strategies/wraps
However I understand that theory is one thing and practice is another, it took a lot of fumbling around when we first began. feel free to contact me if you would like to have a chat.

cheers

Hi number 8

answers to your questions:

1) The bank, You can inform them if you like, it is completely up to you.
I do not quite understand why you are interested in the banks perspective about it? Why invlove them at all, you are not changing your contract with them and they have no part in the process. General rule of thumb in the bank is as long as you are consistently servicing your mortgage then they are happy.

*NOTE if you do want to refinance and harness any existing equity you have in the property be sure to refinance before you enter a vendor finance contract. 

2) It depends on different investments; some JV partners are happy to share a percentage of the deposit &/or the ongoing profit. It is really up to different investors and we work out a way to make everyone happy. Basically investors buy the property and we do the rest to convert it to a positive solution for them, and share the profit after. It is really flexible as the aim is to obtain a win-win situation for everyone.

With the question about someone with a cash job going for a 25 year contract, it all comes down to qualifying them and what the investor wants out of the solution. If the investor wants a return in a few years then we would not qualify a buyer who would not be able to provide this outcome.

Hope this is helpful.

Cheers

That is correct Intrigue

The vendor's name stays on the title and yes if they fail to make payment you retain ownership of the property. The buyer can put a caveat on the property which is generally what happens.

The buyer has to pay stampt duty up front in every state except Melbourne where it is deferred until they get a bank loan.

Your figures:

"If we say it takes them 3 years you would earn $23,868K in the over and above morgage amount (the $153pw) + the $68K = $91,868?"

are correct.  As you can see it is a great way to get fast returns on investment with minimal risk.

The only risk the vendor faces is if the buyer fails to pay and then defaults, however the vendor retains the property. (This all comes down to the initial qualification of the buyer again). A lot of people do not go through this process thoroughly because of the excitement of the deal but I must stress how important it is to qualify them properly.

Does one need a licence or specific qualifications to be able to provide vendor financing of this nature or is it something that anyone can do? I am guessing a good solicitor is beneficial.

Paul,

Re: the banks,

A rumour circulated, was that a key player in the vendor financing industry had his loans called in, as he was doing these deals without disclosure to the banks. This is a concern of mine? Other than that, it does look like a WIN, WIN, and WIN from many angles.

http://www.birchcorp.com.au

Hi Number 8

Was the vendor financier residential, commercial, business? If they were residential I can make a calculated guess as to why. If the buyer does not put a caveat on the property then they are not aware if the vendor is taking their payments and not paying the banks. this is rare however it can happen. This means the vendor loses the property and in turn so does the buyer. Again i must stress, Prequalify the investor, make sure you have a good lawyer who is familiar with vendor finance and protecting every party involved.
We are diligent when it comes to these things because it is the difference between success and failure.
 

cheers

I cannot believe anyone is advocating doing the deal and not discloing the wrap to the financier as this is clearly a case of fraud.

In all of the 181 deals we have done over the last 13 years we have disclosed the fact that the property is being onsold.
Initially this had to go to a National Credit Level in Melbourne of one of the Big 4 but with the support of the Qld State Manager they agreed.

Times have changed a little now and unless you are running it as a business you will certainly struggle to find a lender accept the deal but there are still lenders who do.

The fact that the wrappee registers a caveat against the property will not mean that their interest is protected in any form or shape as the registered mortgagee will still have first right of call. All this does is prevent the wrapper from refinancing, increasing his loan or indeed selling the property without the wrappees consent. Of course there are many ways around this.

Richard,

So you are saying that for average joe this is not an option, unless they are in the business of Vendor financing?

http://www.birchcorp.com.au